Markets & Finance

Navistar's Military Maneuver Pays Off

June 13, 2008

The truckmaker's CEO, Daniel Ustian, has investors—and a tripled share price—on his side since landing major contracts to produce MRAPs. What happens after wartime?

by Steven Gray

Five years ago, , Navistar International's (NAVZ) brand-new chief executive, was in a quandary. For years his company had been an unremarkable manufacturer of trucks, diesel engines, and school buses. But with the U.S. truck market deep in another cyclical downturn, Ustian was feeling heat to come up with a new business line. He considered cement mixers or truck cargo-boxes. But both, he concluded, would put Navistar in too much direct competition with its own customers.

So Ustian went with a third option: He would turn Navistar into a defense contractor. His bet is starting to pay off. At its plant in West Point, Miss., Navistar is building 500 Mine Resistant Ambush Protected vehicles (MRAPs) each month for U.S. troops in Iraq and Afghanistan under a series of Pentagon contracts totaling $3 billion. Now the company is developing a smaller vehicle that might have wider military uses, which could broaden its customer base to include foreign governments.

Dump Trucks

But Navistar's growing military program raises a new question for Ustian: What happens to his company when those wars end for the U.S.?

Ustian insists he has no immediate worries. The company can bank on MRAP sales of $1.5 billion to $2 billion a year until 2010, he says. Meantime, Ustian has boosted Navistar's traditional businesses. On June 12 he announced Navistar is teaming up with Caterpillar (CAT) to build Cat-branded heavy-duty vehicles such as dump trucks in the U.S. and abroad. Navistar has also signed joint ventures to build buses and truck engines in India and has expanded engine production in Latin America and Russia. In addition, the company has been negotiating to purchase General Motors' (GM) medium-duty truck unit, which makes the GMC TopKick and Chevrolet Kodiak.

The CEO faces other concerns. Most notably, the company has been struggling for years to restate its financial results from fiscal 2002 through 2006 to correct a slew of accounting errors. The reporting delays prompted the New York Stock Exchange (NYX) to boot Navistar off its listings; the stock now trades on the Pink Sheets. And for nearly a year, the company has been trading accusations in court with Ford Motor (F) over terms of a diesel engine contract. There's talk on Wall Street, too, that Navistar might be a takeover target.

Military Calling

For now, investors are on Ustian's side. When he took over as CEO in February, 2003, Navistar had just lost $538 million on $7.79 billion in revenue for fiscal 2002, which ended Oct. 31. In fiscal 2007, the company made $426 million from manufacturing on revenue of $12.3 billion, and Ustian predicts Navistar's factory profit could hit $1 billion this year, with sales hitting a record $15 billion. The share price has tripled on Ustian's watch, to $75 in mid-June from $24.05 on his first day.

Ustian, 57, who hired on after answering an ad for an entry-level job in 1973, got the idea to move into the military business from Archie Massicotte. Another longtime Navistar veteran, Massicotte, 55, was then head of manufacturing at Blue Diamond Truck, Navistar's joint venture with Ford. While on assignment in Michigan in late 2002, Massicotte ran into a retired general he had met years earlier. The general, Massicotte recalls, was advising the military on acquiring new technology. "Help me understand this business," Massicotte asked him.

Massicotte spent the following months studying how the military reviews supplier bids and awards contracts. He asked Ustian for six months to develop a plan. Ustian was dubious at first: "Here's Archie, running manufacturing. He's got this idea to get into the MRAP business. How complimentary are those two?" But Ustian figured: "He had the exposure to understand the military, and he understood cost. He's a sales guy." Give me a plan in 30 days, he told Massicotte.

Breakthrough Contract

In late 2003, Ustian issued a press release announcing the start of a new military subsidiary, now called Navistar Defense, with Massicotte as president. Two months later, Ustian detailed his new venture to some 150 analysts and investors. He also vowed to double the company's sales, to $15 billion, by 2009—an audacious goal, considering Navistar had just broken a six-quarter streak of losses.

To get things rolling, Massicotte drafted a dozen truck engineers and assembly-line experts. As the group expanded, he commandeered a conference room inside Navistar's headquarters 30 miles west of Chicago, in Warrenville, Ill. Eventually, the military group grew to about 40 and moved into a nearby building. In January, 2007, Navistar received an order for seven test MRAPs to be delivered within about three months. Thanks to its long expertise in assembly-line production, the company met the tight deadline. It won its first contract, for 1,200 MRAPs for the Army, in May, 2007. The first trucks were delivered in early 2008.

The armored vehicles, with V-shaped hulls to deflect bomb blasts underneath, are immense. Each weighs as much as 20 tons, stretches 23.5 feet in length, and can carry up to 12 people. By comparison, an "up-armored" Humvee is a runt: only 5 tons and 16 feet long.

"Life After MRAP"

Despite the success of Navistar's military gamble, there is some worry inside the company about how long it'll last. It won another contract from the Marines, valued at $261 million, in April. And in May it landed an Army deal to supply $1.28 billion in supply trucks and parts over three years. Nonetheless, the company needs more orders to keep its Mississippi plant busy over the long run. As a hedge, Massicotte has developed the International MXT-MV, a smaller vehicle that, he says, can be used in broader venues, such as border patrols. He says foreign governments have expressed interest in the new truck, though he and Ustian concede that interest and actual orders are two different things.

There's also a risk that Ustian is spreading the company too thin. He scoffs at that notion. "Commercial trucks and diesel engines—that's what we do," he says one afternoon, sitting in a small, bland conference room in Navistar's headquarters. "We already have trucks. No new design. We already have engines. No new design. We have a $3 billion business run by 40 people," he says, leaning back in his chair. "Tell me who in the world has got that?"

Ustian recalls that over dinner one recent evening, Massicotte expressed concern about Navistar's next MRAP order. "There's life after MRAP," Ustian says he told Massicotte, "and you've got to find out what that is." Ustian says he was only half joking.